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•low  to  Put  a  Client 
Fhrough  Bankruptcy 


Modern  American  Law  Lecture 


Blaclutone  Inttitute,  Chicago 


HOW  TO  PUT  A  CLIENT  THROUGH 
BANKRUPTCY 


BY 
ARTHUR  W.  BLAKEMORE,  A.B.,  LL.B. 

OF  THK  BOSTON  KAR 


One  of  a  Series  of  Lectures  Especially  Prepared 
for  the  Blackstone  Institute 


BLACKSTONE    INSTITUTE 
CHICAGO 

Copyright,  1916,  by  Blackstone  Institute 


T 

B 
13/6 


ARTHUR  \\r.  BLAKEMOBE 


ARTHUR  W.  BLAKEMORE 

Mr.  Blakemore  is  a  practicing  attorney  with 
offices  at  40  Central  Street,  Boston,  Mass.  His 
wide  experience  in  active  practice  since  1900  makes 
him  particularly  well  qualified  to  handle  the  very 
practical  subject  of  "How  to  Put  a  Client  Through 
Bankruptcy." 

He  is  a  graduate  of  Harvard  College  and  Har- 
vard Law  School.  Mr.  Blakemore  also  studied  for 
a  time  at  the  Universities  of  Berlin  and  Heidelberg, 
Germany. 

After  he  was  admitted  to  the  bar,  he  devoted  his 
attention  not  only  to  practice  but  also  to  the  prep- 
aration of  legal  articles  on  many  phases  of  the  law 
and  has  become  known  as  an  authority. 

Mr.  Blakemore  is  the  author  of  "Law  of  Real 
Property,"  in  MODERN  AMERICAN  LAW.  In  addi- 
tion he  has  written  several  articles  in  the  Cyclo- 
pedia of  Law  and  Procedure.  lie  is  the  author  of 
"Massachusetts  Court  Rules  Annotated,"  "Blake- 
more and  Bancroft  on  Inheritance  Taxes,"  "Gould 
and  Blakemore  on  Bankruptcy,"  and  has  prepared 
articles  for  several  other  publications. 

Along  with  his  other  activities  Mr.  Blakemore 
has  found  time  to  take  an  active  part  in  civic  en- 
terprises. For  a  period  of  five  years  he  has  served 
as  Alderman  of  the  City  of  Newton,  Massachusetts, 
where  he  resides. 


HOW  TO  PUT  A  CLIENT  THROUGH 
BANKRUPTCY 

By 

ARTHUR  W.  BLAKEMORE,  A.B.,  LL.B. 

PRELIMINARY  SUGGESTIONS 

One  of  the  most  difficult  problems  which  often  faces 
an  attorney,  is  whether  to  advise  a  client  to  go  into 
bankruptcy.  The  question  must  be  answered  by  the 
attorney  unselfishly  and  according  to  the  highest 
ethics  of  the  profession,  as  frequently  the  attorney 
may  believe  that  he  can  get  a  fee  for  himself  by  advis- 
ing a  client  to  go  into  bankruptcy  which  he  would 
not  otherwise  obtain.  Advice  dictated  by  reasons  of 
this  character,  however,  is  not  only  unprofessional  but 
bound  to  lower  the  reputation  of  the  lawyer  who  gives 
it,  as  a  lawyer  makes  his  own  reputation,  which  is 
usually  a  pretty  accurate  mirror  of  what  he  really  is. 

The  bankruptcy  law  is  intended  for  the  relief  of 
honest  debtors  who,  through  bad  management  or  mis- 
fortune, become  so  hopelessly  involved  that  they, 
without  the  aid  of  the  bankruptcy  law,  could  never 
expect  to  be  again  self-supporting  or  self-respecting 
citizens.  The  bankruptcy  law  has  another  object, 
which  is  to  insure  a  fair  and  equal  distribution  of 
whatever  property  the  bankrupt  may  possess  among 

5 


6 

his  creditors,  also  to  assure  that  the  creditors  actu- 
ally get  what  belongs  to  them.  These  two  objects,  the 
protection  of  the  bankrupt  on  the  one  hand,  and  dis- 
tribution of  property  equally  on  the  other,  are  en- 
tirely distinct  and,  as  we  shall  see,  are  accomplished 
under  the  law  by  two  entirely  distinct  proceedings. 
Therefore  when  a  client  comes  to  you  asking  advice 
as  to  whether  he  shall  go  into  bankruptcy,  you  should 
consider  the  question  having  in  mind  the  object  of 
the  act.  You  should  also  remember  that  the  fact  that 
a  man  has  filed  a  petition  in  bankruptcy  is  a  serious 
blot  on  his  business  reputation  and  a  serious  handicap 
to  him  in  any  further  undertaking,  although  cases  are 
numerous  where  bankrupts  have  later  in  life  made 
brilliant  successes.  If,  therefore,  your  client  seems 
simply  to  be  suffering  from  temporary  financial  em- 
barrassment ;  if  he  has  a  going  concern  which,  in  most 
years,  is  apt  to  be  remunerative,  you  should  be  very 
slow  to  advise  him  to  apply  to  the  bankruptcy  court. 
It  may  be  that  you  can  obtain  some  relief  by  repre- 
senting his  situation  fairly  to  his  most  pressing  cred- 
itor and  state  to  him  that  if  he  pushes  his  claim,  your 
client  will  be  obliged  to  go  into  bankruptcy,  in  which 
event  the  creditor  knows  that  his  chances  of  receiving 
any  adequate  dividend  are  slight.  In  many  cases  it  is 
advisable  to  call  an  informal  meeting  of  the  principal 
creditors  and  lay  the  facts  frankly  before  them  and 
offer  them  what  terms  your  client  can  make,  either  ir 
the  way  of  partial  payment  at  once  with  extension 
of  time  for  the  balance,  or  by  making  some  other 
arrangement  which  the  particular  circumstances  of 
the  case  may  suggest  to  you. 


BANKRUPTCY  7 

Most  business  men  today  are  dependent  on  the 
banks  for  ready  capital  to  run  their  business,  and  your 
client's  embarrassment  may  be  caused  by  the  failure 
of  the  bank,  or  by  an  unreasonable  refusal  on  the  part 
of  the  bank  to  renew  his  loans.  In  such  case,  you  can 
do  your  client  a  real  service  very  often  by  helping 
him  to  obtain  credit  at  some  other  bank,  or  even  in 
some  cases  by  obtaining  credit  from  the  principal 
creditors,  either  by  hypothecating  to  them  your 
client's  assets,  or  by  giving  them  in  some  way  an  inter- 
est in  the  business.  This  is  frequently  done  by  form- 
ing a  corporation  and  issuing  to  the  creditors  pre- 
ferred stock  for  their  claims.  Your  argument  to  the 
creditors  will  be,  of  course,  that  they  are  more  inter- 
ested in  the  continued  welfare  of  your  client's  busi- 
ness than  anyone  else  except  your  client  himself. 

In  some  cases  it  may  be  advisable  to  make  a  general 
assignment  for  the  benefit  of  creditors  to  some 
friendly  creditor  or  to  let  some  friendly  creditor 
apply  for  a  receiver.  These  courses  are  usually  wise, 
however,  only  in  case  of  slight  temporary  embarrass- 
ment as  they  are  both  in  themselves  acts  of  bank- 
ruptcy of  which  an  unfriendly  creditor  can  avail  him- 
self to  force  your  client  into  bankruptcy,  as  we  shall 
see,  and  neither  of  them  lead  to  a  discharge.  The  blot 
on  a  man's  reputation  is  practically  the  same  in  one 
case  as  in  the  other,  and  therefore  it  seems  better 
policy  usually  to  go  straight  into  the  bankruptcy 
court,  where  necessary. 

If  all  of  these  courses  are  unavailable,  either  be- 
cause your  client  is  so  hopelessly  involved  that  he  can- 
not obtain  credit,  or  because  of  some  hostile  creditor 


8  MODERN  AMERICAN  LAW  LECTURE 

who  is  harassing  him  with  attachments  and  suits 
which  prevent  him  from  doing  business,  then  you  can 
fairly  say  to  him  that  the  only  way  out  of  his  present 
troubles  is  to  file  a  petition  in  bankruptcy.  In  this 
case,  before  you  do  any  work  or  spend  any  money  in 
his  behalf,  you  should,  for  your  own  protection,  have 
your  fees  for  the  whole  proceeding  paid  in  advance 
or  properly  secured.  It  is  proper  for  the  bankrupt's 
attorney  to  have  a  mortgage  or  bill  of  sale  made  to 
him  by  the  bankrupt  of  the  bankrupt's  property  for 
security,  or  to  have  his  fees  for  the  bankruptcy  pro- 
ceeding paid  at  the  outset,  and  the  court  will  protect 
the  attorney  in  thus  obtaining  a  fair  fee.  In  an  ordi- 
nary case  where  there  are  little  or  no  assets  a  fair 
minimum  fee  will  be  one  hundred  dollars,  and  the 
court  will  allow  more,  depending  on  the  difficulty  and 
size  of  the  case. 

If  your  client  has  positively  no  assets  whatever 
beyond  what  he  has  given  you  for  his  fees,  he  may 
be  able  to  take  the  pauper's  oath  and  file  his  petition 
without  court  fees.  Otherwise,  however,  you  should 
obtain  from  him  for  the  filing  fees  of  the  petition, 
thirty  dollars.  Of  this  amount  the  clerk  receives  ten 
dollars,  the  referee  fifteen  dollars,  and  the  trustee  five 
dollars.  You  \vill  also  be  obliged  later  to  pay  the 
referee  ten  dollars  for  the  expenses  of  notices,  and 
whatever  is  not  used  from  this  sum  will  be  returned 
to  the  bankrupt.  The  blank  forms  for  petition  will 
cost  about  a  dollar  and  a  half. 

When  your  client  first  comes  to  you  to  talk  over 
bankruptcy,  you  should  particularly  advise  him  to 
sign  no  papers  without  your  knowledge  and  make  no 


BANKRUPTCY  9 

private  agreement  or  trade  with  any  creditor,  as  this 
may  be  a  ground  for  opposing  his  discharge  as  being 
a  preference.  If  any  creditor  tries  to  force  your 
client  to  sign  new  notes  for  the  old  obligations,  and 
your  client  feels  disposed  to  do  so  as  a  matter  of  honor 
or  otherwise,  you  had  better  advise  him  to  sign  no 
agreement  to  that  effect,  but  after  obtaining  his  dis- 
charge he  will  have  the  right  to  pay  his  old  indebted- 
ness at  any  time  he  desires.  It  is  also  your  duty  to 
protect  your  client  against  his  own  fraudulent  ten- 
dencies, as  business  men,  when  pressed  by  creditors, 
will  often  be  ready  to  do  things  they  would  not  think 
of  doing  under  ordinary  circumstances.  You  should 
therefore  see  that  your  client  makes  no  secret  convey- 
ances of  his  property  for  the  purpose  of  defrauding 
his  creditors,  or  in  any  way  makes  any  fraudulent 
concealment,  as  the  penalties  of  the  bankruptcy  stat- 
ute are  heavy. 

WHO  MAY  FILE  A  PETITION  AND  WHERE 

You  should  first  consider  whether  your  client  is  en- 
titled to  go  into  bankruptcy.  Any  " person"  may  file 
a  petition  to  be  adjudged  a  voluntary  bankrupt,  and 
the  word  " person"  includes  corporations,  partner- 
ships, and  women.  The  only  exceptions  are  a  Munici- 
pal, Railroad,  Insurance,  or  Banking  corporation.  A 
farmer  or  wage-earner  may  file  a  petition.  The  sole 
qualification  is  that  he  must  owe  debts,  but  no  limit 
is  fixed  of  the  amount  of  such  debts  or  their  number, 
and  one  owing  one  debt  only  may  file  a  petition  unless 
that  debt  be  paid,  or  one  not  released  by  the  discharge. 
Even  a  solvent  person  may  file  a  petition  in  bank- 


10  MODERN  AMERICAN  LAW  LECTURE 

ruptcy.  If  your  client  possesses  the  above  qualifica- 
tions he  may  be  a  bankrupt  even  although  he  is  an 
alien  or  an  Indian.  A  lunatic  in  all  probability  can- 
not file  a  petition,  and  infants  and  married  women 
can  only  do  so  when  under  local  law  they  are  person- 
ally liable  for  their  debts.  Furthermore,  your  client 
must  have  had  a  principal  place  of  business,  resided 
or  had  his  domicile  in  the  United  States  for  the  period 
of  six  months  or  the  greater  portion  thereof  preced- 
ing the  filing  of  the  petition,  or  he  must  have  had 
property  within  the  jurisdiction  of  a  court  of  bank- 
ruptcy. 

The  fact  that  an  involuntary  petition  in  bankruptcy 
has  been  filed  against  him  is  no  bar  to  a  voluntary 
petition  on  his  own  account,  and  neither  is  it  any 
objection  that  he  has  already  made  an  assignment  for 
the  benefit  of  his  creditors  in  the  state  court.  He  must 
file  his  petition  in  the  bankruptcy  court  in  the  district 
where  he  has  had  his  principal  place  of  business, 
resided,  or  had  his  domicile  for  the  greater  part  of  the 
preceding  six  months.  Where  your  client  has  his 
principal  place  of  business  in  one  place  and  resides 
in  another  and  has  his  domicile  in  another,  he  may 
have  an  election,  and  you  should  consider  very  care- 
fully the  local  conditions  and  apply  in  the  district 
where  you  believe  your  client  will  receive  the  most 
favorable  consideration.  You  should  carefully  in- 
quire of  your  client  whether  he  has  ever  gone  into 
bankruptcy  before,  as,  if  he  has  been  granted  a  dis- 
charge in  voluntary  proceedings  within  six  years, 
there  is  no  use  in  filing  his  petition  as  he  cannot  obtain 
another  discharge. 


BANKRUPTCY  11 

DRAFTING  A  VOLUNTARY  PETITION 

When  the  question  of  fees  and  disbursements  is  set- 
tled to  your  satisfaction,  you  should  obtain  the  proper 
blanks  for  a  petition  in  bankruptcy  and  fill  them  out 
with  the  greatest  care  in  triplicate  and  take  pains 
that  your  client  signs  them  in  all  the  various  places 
required. 

Schedules 

In  making  out  the  schedules  of  assets  and  liabilities 
you  should  presume  that  one  reason  of  your  client's 
difficulties  is  on  account  of  his  lax  business  methods, 
and  use  every  precaution  in  your  power  to  make  sure 
that  the  lists  he  gives  you  are  accurate  and  complete. 
If  your  client  omits  from  these  lists  any  of  these 
assets  he  lays  himself  open  to  prosecution  for  crimi- 
nal concealment  of  assets,  while  under  the  present 
bankruptcy  law  if  he  omits  any  of  his  creditors,  those 
creditors  are  not  bound  by  the  discharge  unless  they 
have  actual  knowledge  of  the  proceedings.  You 
should  personally  carefully  examine  your  client's 
books  and  make  sure  that  he  has  omitted  none  of  his 
book  accounts.  You  should  then  use  every  precau- 
tion to  include  in  the  petition  any  claims  of  any  other 
nature  which  may  be  outstanding,  such  as  actions  of 
tort,  claims  on  bonds  he  may  have  signed  for  others, 
accommodation  paper,  or  any  other  possible  claim 
against  him.  Business  men  frequently  prefer  not  to 
put  into  their  schedules  the  claims  of  tradesmen  for 
household  expenses  or  for  wages,  and  this  may  be  a 
matter  of  personal  pride  with  your  client  in  which 
you  will  follow  his  directions. 


12  MODERN  AMERICAN  LAW  LECTURE 

Your  list  of  creditors  will  be  made  up  with  a  view 
of  binding  each  creditor  by  the  discharge  which  you 
hope  to  obtain,  and  for  that  purpose  you  should  fill 
out  the  name,  debt,  and  address  of  each  creditor  as 
accurately  as  possible.  The  creditor  is  not  barred 
where  the  residence  is  not  fully  stated  with  the  street 
and  number,  unless  unknown  to  the  bankrupt,  and 
you  should  put  down  the  residence  as  unknown  only 
where  it  cannot  be  obtained  with  reasonable  diligence. 
The  residence  of  the  creditor  for  this  purpose  is  not 
his  office  or  that  of  his  attorney  or  representative. 
Abbreviations  in  the  schedule  are  expressly  forbid- 
den by  the  rules  of  court,  and  should  be  avoided.  Re- 
sort to  ditto  marks,  for  example,  in  attempting  to 
indicate  a  creditor's  residence,  should  not  be  made. 
The  creditor  will  not  be  barred  where  his  name  is 
misstated  unless  he  has  actual  knowledge  of  the  bank- 
ruptcy, although  a  slight  error  may  be  immaterial 
or  a  business  name  may  be  used.  The  owner  of  the 
claim  at  the  date  of  the  petition  should  be  inserted  in 
the  petition  if  known  to  the  bankrupt,  where  the  claim 
has  been  assigned. 

Exemptions 

You  will  find  in  the  bankruptcy  schedules  a  por- 
tion devoted  to  claim  of  exemptions,  and  you  should 
be  careful  that  your  client  claims  all  exemptions  to 
which  he  is  entitled.  The  bankruptcy  act  adopts  the 
exemptions  set  out  in  the  local  law  of  the  several 
states  and  territories,  and  you  should  examine  that 
local  law  and  frame  your  schedules  with  that  in  view. 
Furthermore,  by  federal  statutes,  military  equip- 
ment, 'pension  money  and  lands  acquired  under  the 


BANKRUPTCY  13 

national  homestead  acts  are  exempt,  the  latter,  how- 
ever, only  as  to  debts  contracted  before  the  date  of  the 
homestead  patent.  The  local  law  of  the  state  of  your 
client  governs  rather  than  that  of  the  state  or  district 
where  the  petition  is  filed.  The  exemption  laws  com- 
monly include  wearing  apparel,  household  furniture, 
tools  and  implements  of  a  trade,  and  many  states  con- 
tain provisions  exempting  the  family  homestead  from 
creditors.  Where  a  partnership  is  in  bankruptcy  an 
individual  partner  cannot  claim  exemptions  out  of 
undivided  firm  property  as  against  a  partnership 
debt.  The  right  of  exemption  in  most  states  applies 
also  to  property  which  a  bankrupt  has  fraudulently 
transferred,  while  some  other  states  provide  that 
property  which  has  not  been  paid  for  or  has  been 
paid  for  with  the  proceeds  of  non-exempt  property 
cannot  be  claimed  to  be  exempt.  The  bankruptcy  act 
has  no  effect  whatever  on  the  rights  of  the  widow 
and  children  to  dower  and  statutory  allowances.  It 
follows  from  what  has  been  said  of  exempt  property 
that  a  lien  which  is  valid  by  state  law  will  not  be 
affected  by  bankruptcy,  as  the  title  of  this  property 
does  not  pass  to  the  trustee  but  remains  in  the  bank- 
rupt, subject  to  such  liens  as  he  may  have  put  upon 
it.  You  should  be  sure  of  your  position  before  claim- 
ing the  exemption  and  be  prepared  to  defend  it,  for 
the  matter  is  entirely  subject  to  the  control  of  the 
bankruptcy  court,  which  has  a  right  to  look  into  the 
matter  and  decide  it.  Remember  that  a  watch  is  not 
wearing  apparel  and  must  be  included  as  assets  in 
some  jurisdictions.  It  is  very  important  to  claim  the 
exemptions  in  the  petition,  as  otherwise  it  is  possible 


14  MODERN  AMERICAN  LAW  LECTURE 

your  client  will  be  taken  to  have  waived  his  rights 
of  exemption,  and  he  will  certainly  be  held  to  have 
waived  them  if  he  does  not  claim  them  before  the  dis- 
charge. 

INVOLUNTARY  PROCEEDINGS 

On  the  filing  of  an  involuntary  petition  a  subpoena 
will  issue  against  your  client  which  must  be  served 
upon  him.  Lawyers  have  been  known  to  secrete  their 
client  to  avoid  service  of  the  petition,  but  entirely 
aside  from  the  fact  that  such  conduct  is  unprofes- 
sional, it  is  hard  to  see  what  practical  advantage  there 
is  in  it  as  the  rights  of  the  creditors  against  liens  date 
from  the  filing  of  the  petition  and  the  only  effect  of 
difficulty  in  obtaining  service  would  be  to  delay  an 
adjudication  and  prejudice  the  court  against  you. 
If  your  client  secretes  himself  so  that  personal  serv- 
ice cannot  be  made,  notice  will  be  given  him  by  pub- 
lication, or  at  his  last  and  usual  place  of  abode.  Your 
client  has  the  right  to  appear'and  plead  without  wait- 
ing for  service  and  in  some  cases  this  may  be  wise  to 
placate  creditors.  If  you  desire  to  question  the  valid- 
ity of  the  service  of  the  subpoena,  you  should  do  this 
by  direct  motion  to  set  aside  the  marshal's  return. 

In  case  different  proceedings  are  filed  against  your 
client  in  different  courts  you  should  see  that  the  pro- 
ceedings are  transferred  to  the  proper  court  so  that 
only  one  proceeding  will  remain  against  him.  You 
should  protect  your  client  against  any  abuse  of  this 
process,  and  if  there  seems  no  probable  ground  for 
the  petition  you  should  advise  the  creditors  that  you 
will  hold  them  liable  for  all  damages  caused  by  the 


BANKRUPTCY  15 

filing  of  the  petition.  This  may  be  sufficient  to  cause 
them  to  withdraw  it  as  you  have  a  right  of  action  for 
damages  for  the  institution  of  proceedings  begun 
maliciously  and  without  probable  cause  which  termi- 
nate without  an  adjudication  in  bankruptcy. 

When  service  is  properly  made  you  have  then  five 
days  after  the  return  day  within  which  you  may  plead 
to  the  petition.  It  is  your  first  duty  to  examine  the 
petition  with  the  greatest  care  and  see  whether  it  con- 
forms with  all  legal  requirements.  You  should  first 
consider  whether  the  court  has  jurisdiction  of  the 
proceeding,  and  you  may  attack  this  jurisdiction  on 
the  ground  that  your  client  did  not  have  the  necessary 
residence  or  place  of  business  within  the  district  or 
that  the  petition  does  not  show  the  proper  number  of 
creditors. 

The  petition  must  be  filed  by  three  creditors 
whose  claims  in  excess  of  any  security  aggregate  $500 
or  over  unless  the  total  number  of  creditors  of  your 
client  is  less  than  twelve  when  one  creditor  may 
file  a  petition.  If  one  creditor  petitions,  the  fact  that 
the  total  number  of  creditors  is  less  than  twelve  must 
appear  on  the  petition.  If  any  of  the  creditors  are 
corporations  you  should  see  that  the  petition  is  signed 
by  the  proper  officers  authorized  to  bind  the  corpora- 
tion. The  creditors  may  be  estopped  from  filing  a 
petition  by  having  taken  part  in  some  act  which  they 
now  claim  to  be  an  act  of  bankruptcy.  The  petition 
must  show  that  your  client  owes  debts  to  the  amount 
of  $1,000  or  more  and  is  within  the  class  subject  to 
bankruptcy  proceedings,  and  if  he  has  committed  an 
act  of  bankruptcy  within  four  months  prior  to  the 


16  MODERN  AMERICAN  LAW  LECTURE 

filing  of  the  petition  you  should  insist  that  the  act  of 
bankruptcy  is  distinctly  and  properly  set  out  and  you 
have  a  right  to  ask  for  specifications  as  to  just  what 
the  act  consisted  in. 

If  you  desire  to  attack  the  petition  you  may  file 
exceptions  or  you  may  demur  or  move  to  dismiss  the 
petition  but  in  making  your  dilatory  pleas  attacking 
the  petition,  you  should  remember  that  the  court  has 
the  right  to  allow  the  petition  to  be  amended  and  will 
probably  do  so  to  correct  technical  defects. 

If  you  desire  a  jury  trial  on  the  question  of  the  sol- 
vency of  your  client  you  should  file  a  written  applica- 
tion therefor  within  five  days  of  the  return  day. 
When  you  do  not  claim  a  jury  trial,  the  hearing  will 
take  place  before  the  judge.  It  is  usually  wise  to  ask 
for  a  jury  trial  as  a  matter  of  tactics,  as  it  will  usu- 
ally cause  a  delay  in  the  proceedings  and  you  can 
waive  the  claim  at  any  time.  This  gives  you  more 
time  to  work  up  your  defense.  On  the  other  hand,  if 
you  think  the  petitioners  are  not  entirely  prepared, 
you  should  not  claim  a  jury  trial  but  should  insist  on 
a  speedy  trial  before  the  judge. 

At  the  hearing  of  the  question  of  adjudication,  the 
burden  of  proof  is  on  the  petitioners  to  establish  all 
the  facts  alleged  in  their  petition. 

If  other  pleadings  are  disposed  of,  you  should  then 
file  a  reply  on  the  merits  by  answer,  remembering 
that  an  answer  before  that  time  will  waive  any  de- 
murrer or  other  dilatory  plea.  The  answer  should  be 
in  the  form  prescribed  by  the  Supreme  Court.  You 
may  by  answer  interpose  the  defense  that  your  client 
is  exempt  from  adjudication;  that  he  did  not  have 


BANKRUPTCY  17 

his  domicile,  residence,  or  place  of  business  within  the 
district  for  the  greater  part  of  six  months  preceding 
the  filing  of  the  petition ;  that  the  petitioners  are  not 
creditors  or  that  their  debts  are  less  than  $500 ;  that 
your  client  has  not  committed  an  act  of  bankruptcy ; 
and  in  most  cases,  that  he  was  solvent  at  the  time  of 
the  filing  of  the  petition.  The  defense  of  solvency 
will  depend  on  the  act  of  bankruptcy  alleged. 

You  should,  in  any  negotiations  looking  toward  a 
dismissal  of  the  petition  by  the  petitioning  creditors, 
remember  that  any  other  creditors  besides  those  who 
have  filed  the  petition  have  a  right  at  any  time  to 
intervene  and  insist  that  the  petition  be  prosecuted. 

ACTS  OP  BANKRUPTCY 

When  the  question  arises  whether  your  client  has 
committed  an  act  of  bankruptcy,  you  should  make  a 
careful  study  of  the  facts  and  the  law  governing  the 
situation.  A  detailed  statement  of  what  constitutes 
an  act  of  bankruptcy  is  hardly  within  the  scope  of  this 
monograph.  If  your  client  is  a  corporation,  the  cred- 
itors must  prove  that  the  act  relied  upon  was  com- 
mitted by  the  corporation  itself  or  by  one  having  au- 
thority to  bind  it.  In  the  case  of  a  partnership  the 
act  of  bankruptcy  may  be  committed  by  less  than  all 
of  the  partners  where  such  act  was  within  the  scope 
of  the  partnership  business  so  as  to  constitute  it  in 
fact  an  act  of  the  firm. 

Only  acts  expressly  set  down  in  the  bankruptcy 
statute  can  be  claimed  to  be  acts  of  bankruptcy,  and 
these  consist  in  general  of  a  fraudulent  conveyance, 
a  preference,  a  general  assignment  or  application  for 


18  MODERN  AMERICAN  LAW  LECTURE 

a  receiver  or  an  admission  in  writing  of  inability  to 
pay  debts  and  willingness  to  be  adjudged  a  bankrupt 
on  that  ground.  The  insolvency  of  the  debtor  at  the 
time  of  a  fraudulent  conveyance  need  not  be  proved, 
as  it  is  enough  if  he  is  insolvent  at  the  time  that  the 
petition  is  filed.  Insolvency  is  an  essential  to  any 
preference  or  where  the  appointment  of  a  receiver 
has  been  sought  but  not  in  case  of  a  general  assign- 
ment. The  bankruptcy  act  lays  down  a  rule  for  insol- 
vency which  is,  shortly  stated,  that  one  is  insolvent 
whenever  all  his  property  is  less'  than  the  amount 
of  all  his  debts. 

In  case  a  preference  is  charged,  the  creditors  must 
prove  the  actual  transfer  of  property  and  your 
client's  intent  to  prefer  the  creditor  in  question,  and 
the  insolvency  of  your  client  at  the  time  of  the  trans- 
fer. They  must  also  show  that  the  property  trans- 
ferred belonged  to  the  debtor.  Preferences  may  be 
involuntary  as  where  your  client  has  suffered  or  per- 
mitted a  creditor  to  obtain  a  preference  through  an 
attachment  or  sale  on  execution  or  other  legal  pro- 
ceedings. All  acts  of  bankruptcy  must  be  shown  to 
have  taken  place  within  four  months  of  the  filing  of 
the  petition. 

PARTNERSHIPS 

Partnership  proceedings  in  bankruptcy  are  more 
complicated  than  any  other  form  of  proceedings,  and 
to  understand  them  a  clear  knowledge  of  the  substan- 
tive law  of  partnership  is  necessary.  The  bankruptcy 
act  recognizes  the  partnership  as  a  separate  entity  to 
some  extent.  Thus  the  partnership  may  file  a  volun- 
tary petition  or  all  or  any  one  of  the  partners  may 


BANKRUPTCY  19 

file  a  petition,  or  an  involuntary  petition  may  be  filed 
against  a  partnership  as  a  whole,  or  against  partners 
or  any  one  of  them.  As  all  the  partners  are  person- 
ally liable  for  the  partnership  debts,  it  follows  that  the 
partnership  is  insolvent  only  when  the  firm  debts  ex- 
ceed the  value  of  the  property  of  the  firm  and  that  of 
the  partners  applicable  to  the  payment  of  the  firm 
debts.  A  firm  is  solvent  while  any  of  the  partners 
are  able  to  pay  the  firm  debts. 

Where  a  petition  is  filed  by  all  of  the  partners  it  is 
a  voluntary  proceeding  and  the  solvency  of  the  firm 
is  immaterial,  and  when  a  petition  is  filed  by  less  than 
all  of  the  partners  the  non-assenting  partner  may  de- 
fend on  the  ground  that  he  is  solvent  and  therefore 
the  firm  is  solvent.  Where  creditors  of  your  clients 
file  an  involuntary  petition  they  must  prove  the  part- 
nership as  insolvent  whenever  such  an  allegation  is 
necessary  in  the  case  of  an  individual.  One  partner 
in  a  partnership  may  file  a  petition  or  a  petition  in 
involuntary  bankruptcy  may  be  filed  against  him.  In 
case  some  of  the  partners  are  not  bankrupt,  such 
partner  or  partners  should  settle  the  partnership 
business  as  expeditiously  as  possible.  In  such  pro- 
ceedings by  or  against  an  individual  partner  the  part- 
nership debts  and  assets  are  not  concerned  but  the 
individual  debts  and  assets,  including  the  interest  of 
the  bankrupt  partner  in  the  partnership,  are  admin- 
istered in  bankruptcy. 

If  your  client  is  a  member  of  a  partnership  which 
has  no  assets,  you  must  so  act  that  he  will  obtain  a 
discharge  from  his  partnership  as  well  as  his  per- 
sonal obligations.  This  may  be  done  by  an  individual 


20  MODERN  AMERICAN  LAW  LECTURE 

petition  setting  forth  the  partnership  as  well  as  indi- 
vidual debts  and  assets  and  giving  notice  to  the  firm 
partners  of  the  proceeding,  but  in  such  case  the  safer 
course  is  to  have  both  the  partnership  and  your  client 
adjudicated  bankrupts,  as  then  there  can  be  no  ques- 
tion but  that  a  discharge  will  operate  as  a  release  of 
both  firm  and  individual  liabilities.  "Where  all  the 
partners  unite  in  a  petition,  the  filing  of  such  petition 
is  an  act  of  bankruptcy,  and  the  prayer  should  be  to 
discharge  both  the  partners  and  the  firm,  that  the 
firm  and  the  several  partners  constituting  said  firm 
may  be  adjudged  bankrupts.  You  must  file  with  the 
petition  a  schedule  of  the  assets  and  debts  of  the  firm 
and  a  separate  schedule  of  the  debts  and  assets  of 
each  partner. 

Where  creditors  bring  involuntary  proceedings 
against  your  client,  their  petition  against  the  firm 
and  the  partners  constitutes  one  proceeding  and  must 
contain  the  same  requisites  as  in  case  of  proceedings 
against  an  individual.  They  should  name  all  of  the 
partners  and  bring  them  before  the  court.  The  cred- 
itors are  bound  to  prove  affirmatively  that  the  part- 
nership exists,  and  that  an  act  of  bankruptcy  has  been 
committed,  both  by  the  partnership  and  by  each  indi- 
vidual partner.  If  one  of  the  partners  is  exempt  as 
a  wage-earner  or  a  farmer,  he  cannot  be  adjudged  a 
bankrupt  in  involuntary  proceedings. 

If  some  of  the  partners  desire  to  go  into  bank- 
ruptcy and  some  do  not,  some  of  the  partners  may 
file  a  petition  to  bring  the  firm  and  the  partners  into 
bankruptcy,  and  such  proceedings  are  voluntary  as 
to  the  petitioning  partners  and  involuntary  as  to 


BANKRUPTCY  21 

partners  refusing  to  join.  The  petition  should  state 
the  names  of  all  the  partners  and  ask  for  notice  to 
be  served  on  the  partners  not  petitioning.  The  peti- 
tion need  not  set  out  an  act  of  bankruptcy  by  the  firm 
or  the  petitioning  partners  other  than  their  inability 
to  pay  debts,  and  willingness  to  be  adjudged  bank- 
rupts on  that  ground.  In  order  to  bring  into  bank- 
ruptcy partners  not  joining  in  the  petition,  an  act  of 
bankruptcy  must  be  set  out  against  each  of  these,  and 
in  such  case  a  separate  schedule  of  the  assets  and 
debts  of  each  petitioning  partner  must  be  annexed  to 
the  petition,  and  you  must  see  that  notice  is  properly 
served  on  all  partners  not  joining  in  the  petition. 

You  may  have  a  wide  choice  as  to  the  court  you 
select  for  the  petition  in  a  partnership  case,  as  it  may 
be  filed  in  any  district  where  the  firm  has  had  its 
principal  place  of  business  for  the  greater  portion  of 
the  six  months  preceding  the  filing  of  the  petition, 
or  it  may  be  filed  in  any  district  where  a  court  of 
bankruptcy  has  jurisdiction  of  one  of  the  partners. 
In  case  of  opposing  interests  you  should  try  to  file 
your  petition  as  soon  as  possible,  as  where  petitions 
are  filed  in  separate  districts,  that  court  where  the 
petition  is  first  filed  has  sole  jurisdiction. 

You  must  advise  your  client  that  when  the  partner- 
ship itself  is  declared  bankrupt,  this  brings  into  the 
bankruptcy  court  the  individual  assets  and  debts  of 
the  several  partners  to  be  there  administered.  When 
you  come  to  the  election  of  a  trustee  in  a  partnership 
case  the  same  considerations  apply  as  in  individual 
cases. 

Where  a  firm  is  adjudged  bankrupt,  the  creditors 


22  MODERN  AMERICAN  LAW  LECTURE 

of  the  partnership  appoint  a  trustee  for  the  creditors, 
and  the  individual  partners  are  not  entitled  to  vote. 
Where  a  partner  in  a  firm  is  adjudged  bankrupt,  the 
trustee  may  be  elected  by  the  firm  creditors  and  the 
individual  creditors  of  that  partner.  A  trustee,  if 
elected  by  the  firm  creditors  where  a  partnership  is 
adjudged  bankrupt,  administers  both  the  partnership 
property  and  the  property  belonging  to  the  individ- 
ual partners,  even  when  they  are  not  adjudged  bank- 
rupt. Where  the  partners  and  not  the  firm  are 
adjudged  bankrupt,  the  trustee  administers  the  in- 
dividual estate  of  the  partner,  including  his  interest 
in  the  partnership,  but  has  nothing  to  do  with  the 
firm  property.  Where  your  client  is  a  member  of 
different  firms,  and  adjudications  are  made  against 
all  of  them,  each  estate  must  be  accounted  for  sep- 
arately, but  where  the  same  partners  conduct  busi- 
ness in  different  places  under  different  names,  the 
two  firms  will  be  treated  as  one  firm  in  the  distribu- 
tion of  assets.  You  may  have  to  advise  your  client  as 
to  what  are  firm  debts  and  assets.  A  general  rule  is 
that  firm  assets  are  those  assets  used  in  the  general 
firm  business,  while  individual  assets  are,  of  course, 
the  private  property  of  the  partner,  which  has  noth- 
ing to  do  with  the  business  of  the  firm  as  transacted 
in  its  usual  course.  As  to  debts,  there  may  be  very 
troublesome  questions  as  to  what  debts  contracted  by 
individual  partners  were  contracted  in  the  name  of 
the  firm,  and  what  are  individual  debts  contracted 
in  the  partner's  private  business. 

Proceedings  for  a  discharge  are  the  same  in  part- 
nership as  in  other  cases,  and  the  general  rule  will 


BANKRUPTCY  39 

be  followed  that  whoever  is  adjudicated  bankrupt 
may  petition  for  a  discharge.  You  must  be  sure  that 
your  individual  client  gets  a  personal  discharge,  as 
the  only  effect  of  a  discharge  of  the  partnership  is  to 
release  the  firm  from  firm  debts,  and  this  does  not 
affect  the  liability  of  a  partner  for  those  debts.  The 
partner,  of  course,  cannot  obtain  a  discharge  indi- 
vidually unless  he  has  been  adjudicated  a  bankrupt. 
A  personal  discharge  by  a  partner  will  release  him 
from  firm  as  well  as  individual  debts  when  the  firm 
debts  are  properly  scheduled,  although  there  is  some 
authority  to  the  contrary. 

CORPORATIONS 

If  your  client  is  a  corporation  which  must  go  into 
bankruptcy,  the  question  at  once  arises  who  has  the 
authority  to  authorize  the  filing  of  the  petition. 
Doubtless,  in  some  cases  the  Board  of  Directors  may 
be  given  this  authority,  but  as  a  general  rule  you 
should  have  a  regularly  called  meeting  of  the  stock- 
holders and  have  the  stockholders  pass  a  vote  author- 
izing the  execution  and  filing  of  a  petition  in  bank- 
ruptcy. All  corporations  except  a  Municipal,  Bail- 
road,  Insurance,  or  Banking  corporation  may  go  into 
bankruptcy,  and  even  a  charitable  or  religious  cor- 
poration has  that  privilege. 

LOOTS 

The  nature  and  validity  of  the  liens  against  your 
client's  property  will,  very  often,  determine  your 
attitude  in  regard  to  filing  a  petition  in  bankruptcy, 


24  MODERN  AMERICAN  LAW  LECTURE 

as  a  lien  which  stands  on  record  for  four  months  is 
good  as  against  a  trustee.  You  may  find  it  necessary 
to  prevent  any  one  creditor  from  obtaining  a  prefer- 
ence over  others  to  hasten  your  petition  in  bank- 
ruptcy and  take  pains  to  file  it  before  the  expiration 
of  the  four-months  period.  Creditors  who  are  alive 
to  their  rights  will  also  bear  this  in  mind  and  will, 
doubtless,  file  an  involuntary  petition  within  the  four- 
months  period,  if  you  do  not  file  a  voluntary  petition 
for  your  client.  The  validity  and  extent  of  a  lien 
is  determined  by  local  law,  as  the  bankruptcy  act 
recognizes  all  liens  valid  under  state  law  unless  pro- 
hibited by  the  bankruptcy  act.  It  is  a  prime  neces- 
sity of  such  a  lien  that  it  be  recorded  in  accordance 
with  state  laws,  and  the  difficult  questions  as  to  just 
what  liens  are  valid  and  when  possession  under  a 
lien  is  sufficient,  are  hardly  within  the  scope  of  this 
Lecture.  In  considering  these  liens  you  will,  of 
course,  remember  that  the  trustee  is  bound  to  prove 
that  the  lien  accrued  against  your  client  at  a  time 
when  he  was  insolvent.  The  four-months  period 
dates  from  the  time  of  the  creation  of  the  lien,  and 
not  its  enforcement.  These  principles  apply  to  ad- 
miralty, to  an  assignment  or  lien  on  future  earnings, 
to  attachments,  to  a  lien  of  an  attorney  or  auctioneer, 
or  to  an  equitable  lien  as  obtained  by  creditors  by 
agreement  to  give  security,  or  by  assignment.  Such 
liens  may  also  be  created  by  various  proceedings  sup- 
plementary to  execution,  by  garnishment  or  by  judg- 
ment. The  lien  may  be  a  common  law  lien,  as  that  of 
a  landlord  or  artisan,  or  a  mechanics'  lien  created  by 
state  statute,  or  a  mortgage  or  pledge. 


20 

ELECTION  AND  EXAMINATION  OP  TRUSTEE 

When  the  adjudication  has  been  had,  the  next  im- 
portant proceeding  is  the  election  of  the  trustee. 
You  should  remember  that  the  bankrupt  has  no  right 
to  interfere  in  any  way  directly  or  indirectly  with 
the  selection  of  the  trustee,  and  you  should  advise 
your  client  to  that  effect.  If  you,  or  anybody  rep- 
resenting the  bankrupt,  solicit  claims  in  any  way 
to  vote  those  claims  at  the  creditors'  meeting,  all  such 
claims  may  be  thrown  out  at  the  election  and  the 
votes  not  counted.  If  some  officer  or  employee  of  the 
bankrupt  has  a  claim,  you  should  be  a  little  cautious 
how  you  let  him  vote,  as  his  vote  for  one  candidate 
might  give  the  referee  the  impression  that  that  can- 
didate was  really  working  for  the  bankrupt  and  not 
for  the  creditors,  and  might  lead  the  referee  to  refuse 
to  confirm  him  if  elected.  As  a  matter  of  practice, 
in  most  cases,  the  bankrupt  and  his  attorney  do  exer- 
cise all  the  influence  they  can  in  favor  of  the  election 
of  some  trustee  whom  they  think  will  be  favorable 
to  the  bankrupt. 

You  have  a  right,  however,  to  insist  that  the  trus- 
tee shall  be  fair  minded  and  unbiased,  and  you  can 
properly  object  to  the  confirmation  of  any  trustee 
whom  you  can  show  the  referee  to  be  actuated  by 
personal  spite  or  malice  against  your  client.  You 
can  also  argue  that  the  trustee  selected  by  the  cred- 
itors is  entirely  unfitted  through  ignorance  of  your 
client's  line  of  business  to  handle  the  situation,  and 
that  his  confirmation  might  be  of  great  injury  to 
your  client.  If  you  make  any  such  objection,  you 


26  MODERN  AMERICAN  LAW  LECTURE 

will,  of  course,  state  to  the  referee  that  you  have  no 
one  in  mind  whom  you  would  like  to  have  appointed 
but  will  be  satisfied  with  any  unbiased  person  who  is 
competent  to  attend  to  the  business.  Such  an  objec- 
tion, however,  is  very  dangerous,  as,  if  you  fail,  you 
will  at  the  start  have  prejudiced  the  trustee  against 
your  client,  and  no  such  objection  will  prevail  any- 
way unless  you  make  out  a  very  clear  case. 

In  order  to  constitute  an  election,  one  candidate 
must  have  a  majority  in  number  and  amount  of  all 
the  unsecured  claims  which  are  presented  and  voted 
on  at  the  meeting. 

When  the  trustee  is  once  selected,  you  should  make 
every  effort  to  co-operate  with  him  in  his  work,  as 
his  good  will  is  absolutely  essential  for  you  to  obtain 
a  discharge.  You  should  offer  to  have  your  client 
submit  to  an  examination  at  any  time  at  the  conveni- 
ence of  the  trustee;  you  should  bring  him  all  the 
books  of  account  of  the  business  and  offer  to  assist 
him  in  any  way  in  explaining  any  matters  he  may 
desire.  You  have  an  absolute  right  to  be  present  at 
the  examination  and  to  warn  your  client  not  to  an- 
swer any  question  which  may  tend  to  incriminate  him 
by  subjecting  him  to  criminal  proceedings.  It  may 
be  very  difficult  for  you  to  decide  what  course  to  pur- 
sue as  to  this.  You  should  first  satisfy  yourself,  if 
possible,  whether  your  client  is  in  fact  guilty  of  im- 
propriety, remembering  always  that  your  client  may 
be  as  likely  to  try  to  deceive  you  as  others.  If  you 
believe  your  client  to  be  innocent,  you  should,  in  most 
cases,  offer  no  objections  to  any  questions  whatever, 
while  if  you  fear  he  may  be  guilty,  your  conduct  will 


BANKRUPTCY  2T 

depend  on  the  circumstances  of  each  case,  remember- 
ing always  that  even  a  criminal  has  a  right  to  the 
protection  and  advice  of  counsel. 

CONTEMPT 

You  should  see  that  your  client  does  not  subject 
himself  to  liability  for  contempt  of  court,  either  by 
disrespect  to  the  court  or  its  proper  officers,  or  by 
failing  to  answer  questions  or  to  turn  over  property 
when  ordered,  or  to  obey  any  other  order  of  the  court. 
The  only  defense  your  client  can  have  for  failing  to 
obey  an  order  of  court  is  his  bona  fide  inability  to 
comply  with  it  or  that  the  order  itself  is  void.  In 
case  your  client  is  charged  with  contempt  of  court, 
the  proceedings  against  him  may  be  either  criminal 
or  civil  in  nature,  and  ordinarily  in  case  of  a  con- 
structive contempt  not  committed  in  the  face  of  the 
court,  will  be  begun  by  a  petition  or  information. 
The  court  will  then  give  your  client  notice  of  the  pro- 
ceedings, and  he  will  have  an  opportunity  to  file  an 
answer  in  which,  under  some  circumstances,  he  may 
purge  himself  of  the  contempt  by  affidavit  explaining 
the  whole  matter,  although  it  is  the  modern  rule  that 
the  denials  of  the  bankrupt  are  not  conclusive  on  the 
court.  You  have  a  right  to  insist  that  the  contempt 
proceedings  should  be  heard  before  the  court  and 
not  before  the  referee.  If  your  client  has  been 
arrested  you  will,  of  course,  obtain  bail,  if  possible, 
for  him. 

OFFENSES 

It  is  your  duty  carefully  to  steer  your  client  clear 
of  any  of  the  offenses  laid  down  in  the  Bankruptcy 


28  MODERN  AMERICAN  LAW  LECTURE 

Act,  for  if  he  is  found  guilty  of  any  of  these  acts  he 
will  be  denied  his  discharge.  The  offenses  include 
concealment  of  property  from  the  trustee  by  the 
bankrupt;  and  here  you  must  remember  that  the 
courts  have  said  that  on  account  of  the  nature  of  the 
transaction,  reliance  must  be  placed  on  circumstan- 
tial evidence,  and  you  must,  therefore,  be  prepared 
to  explain  to  the  trustee  any  unexplained  shrinkage 
of  assets  or  any  other  suspicious  circumstances.  It 
is,  of  course,  an  offense  to  make  a  false  oath  or 
account  in  bankruptcy  or  for  any  person  to  receive 
property  from  the  bankrupt  with  intention  to  defeat 
the  act.  Extortion,  by  attempting  to  obtain  money  or 
property  in  return  for  any  course  of  conduct  in  bank- 
ruptcy proceedings,  is  also  an  offense.  If  your  client 
is  charged  with  any  one  of  these  things,  your  client's 
schedules  in  bankruptcy  may  be  admitted  as  evidence 
against  him,  and  if  he  delivers  his  books  of  account 
or  papers  to  the  trustee  without  claiming  an  immu- 
nity on  account  thereon,  any  such  immunity  is  waived 
and  all  such  books  of  account  and  papers  are  evi- 
dence against  him.  His  testimony,  if  given  by  him, 
at  a  creditor's  meeting  cannot,  however,  be  used 
against  him. 

COMPOSITIONS 

Under  some  circumstances  it  may  be  wise  for  you 
to  make  an  offer  of  compromise  to  the  creditors  as 
provided  for  by  the  Bankruptcy  Act.  The  offer  will 
consist  of  a  statement  of  your  client's  assets  and  all 
his  debts,  and  state  what  percentage  of  these  debts 
you  are  willing  to  pay  in  consideration  of  receiving 
a  discharge.  The  creditors  will  then  hold  a  meeting 


BANKRUPTCY  29 

and  decide  the  matter  and  the  majority  in  number 
and  amount  of  the  creditors  can  vote  to  accept  the 
offer  and  thus  bind  all  other  creditors.  The  offer  of 
composition  cannot  be  made  until  after  the  filing  of 
the  schedule  and  the  examination  of  your  client  in 
court  or  at  a  meeting  of  the  creditors,  although  the 
offer  may  be  made  before  adjudication.  If  it  seems 
advisable  to  make  an  offer  in  composition  at  all  you 
should  make  it  in  an  involuntary  case  before  the 
adjudication  and  thus  try  to  save  your  client  the 
stigma  of  adjudication. 

The  composition  will  not  be  ordered,  however, 
until  your  client  files  in  court  the  acceptance  of  his 
offer  signed  by  a  majority  in  number  of  all  the  cred- 
itors whose  claims  have  been  allowed,  which  must 
represent  the  majority  in  amount  of  such  claims.  He 
must  also  deposit  in  court  the  consideration  to  be 
paid  by  him  to  the  creditors,  including  the  money 
necessary  to  pay  debts  which  have  priority  and  the 
costs  of  the  proceeding.  The  composition  may  be 
opposed  by  other  creditors  and  will  not  be  confirmed 
by  the  court  if  it  appears  that  your  client  has  been 
guilty  of  any  offense,  or  has  laid  himself  open  to 
any  of  the  objections  which  would  bar  his  discharge, 
and  furthermore  it  must  appear  that  the  agreement 
of  composition  was  not  obtained  by  fraud.  If  the 
composition  is  confirmed  by  the  court  its  effect  is  to 
revest  in  the  bankrupt  the  title  to  his  estate  and 
discharge  the  trustee,  and  discharge  your  client  from 
his  debts,  except  those  agreed  by  the  terms  of  the 
composition  to  be  paid,  and  those  not  affected  by  the 
discharge.  You  must  remember  that  even  after  the 


30  MODERN  AMERICAN  LAW  LECTURE 

composition  is  confirmed  the  court  has  power  to  set 
it  aside  for  fraud. 


ARBITRATION 

In  case  you  get  into  any  controversy  with  the 
trustee  you  may  properly  suggest  to  him  that  he 
leave  the  controversy  to  arbitration  and  he  may  then 
make  application  to  the  court  setting  out  clearly  the 
whole  matter  and  giving  notice  to  the  creditors  and 
asking  that  the  order  of  arbitration  be  issued. 

PETITION  FOR  DISCHARGE 

The  real  purpose  of  your  client  in  going  into  bank- 
ruptcy voluntarily  is  to  obtain  a  legal  discharge  from 
his  debts  and  it  is  your  duty  to  frame  all  your  action 
and  advice  with  this  in  view.  The  creditors  may 
oppose  his  discharge,  as  we  shall  see,  on  certain  lim- 
ited grounds  and  you  should  if  possible  so  advise  your 
client  as  to  give  the  creditors  no  grounds  to  object. 

The  petition  for  discharge  you  must  remember  is 
a  separate  proceeding  from  the  original  bankruptcy 
petition.  Your  original  petition  was  simply  for  an 
adjudication  and  can  not  entitle  your  client  to  a  dis- 
charge. It  is  your  duty  therefore  to  be  sure  to  file  for 
him  his  petition  for  a  discharge  as  a  separate  peti- 
tion, which  will,  however,  be  numbered  and  treated 
as  a  part  of  the  bankruptcy  proceedings. 

This  petition  may  be  filed  after  the  expiration  of 
one  month  and  within  a  year  subsequent  to  the  adju- 
dication in  bankruptcy,  and  it  is  well  to  note  on  your 
diary  the  earliest  date  when  you  are  entitled  to  file 


BANKRUPTCY  31 

it.  The  time  of  course  dates  from  the  original  peti- 
tion in  voluntary  cases,  as  the  adjudication  takes 
place  on  the  filing  of  the  petition. 

Whether  it  is  wise  or  not  to  file  a  petition  at  the 
earliest  possible  date  is  a  question  which  you  should 
carefully  consider.  The  trustee  at  that  time  may 
not  have  completed  his  examination  of  the  bankrupt 
and  may  not  have  satisfied  himself  that  your  client 
has  made  a  full  disclosure  of  all  his  assets.  Fur- 
thermore, you  must  remember  that  notice  of  your 
petition  will  be  sent  to  all  creditors,  and  some  cred- 
itors may  be  angry  with  your  client  for  going  into 
bankruptcy  and  will  be  more  likely  to  oppose  his 
discharge  if  you  file  your  petition  promptly  than  if 
you  wait  for  the  lapse  of  time  to  heal  their  wounds. 
The  petition  for  a  discharge  filed  promptly  at  the 
end  of  thirty  days  will  almost  always  be  premature 
as  a  practical  matter,  and  when  the  trustee  is  called 
upon  to  report  as  to  the  discharge  he  will  almost 
always  ask  for  further  time,  so  that  you  will  really 
gain  nothing  by  prompt  action.  The  wiser  course 
will  be  in  most  cases  to  confer  with  the  trustee  from 
time  to  time  and  offer  him  all  assistance  in  his  work 
and  file  your  petition  as  soon  as  he  is  ready  to  report 
on  the  discharge.  Of  course  if  you  find  that  the 
trustee  or  any  of  the  creditors  are  irreconcilably 
opposed  to  the  discharge  your  tactics  will  be  dif- 
ferent and  you  will  then  file  your  petition  and  push 
it  to  a  hearing  as  promptly  as  possible  on  the  theory 
that  this  will  put  the  creditors  to  the  expense  of  pre- 
paring for  trial  which  they  may  be  unwilling  to 
incur  and  that  a  vigorous  determination  on  your 


32  MODERN  AMERICAN  LAW  LECTURE 

part  to  press  for  a  hearing  will  make  them  think  that 
your  client  has  a  good  case  on  which  to  obtain  a  dis- 
charge and  that,  it  is  useless  to  oppose  it.  You  may 
also  find  that  some  creditors  are  opposing  the  dis- 
charge simply  as  a  species  of  blackmail  in  an  attempt 
to  force  your  client  to  sign  new  notes  promising  to 
pay  his  old  indebtedness  or  to  obtain  for  themselves 
some  other  particular  advantage  not  possessed  by 
the  other  creditors.  You  should  particularly  advise 
your  client  to  sign  nothing  without  your  advice  and 
to  make  no  promises  whatever  to  any  creditor,  as 
any  such  special  advantage  is  illegal  under  the  bank- 
ruptcy act,  the  theory  of  which  is  that  all  creditors 
shall  share  equally  in  the  bankrupt's  estate  and  that 
an  honest  bankrupt  is  entitled  to  his  discharge  with- 
out making  any  trade  with  any  creditor  to  get  it. 
If,  therefore,  you  push  the  petition  for  discharge 
vigorously  you  will  disarm  any  such  creditor,  as  you 
will  force  him  to  prove  his  case,  and  your  client 
should  then  promptly  be  given  his  discharge  by  the 
court. 

The  petition  for  discharge  may  be  filed  by  any 
person  who  has  been  adjudged  a  bankrupt,  whether 
in  voluntary  or  involuntary  proceedings,  and  even 
by  an  insane  person.  The  petition  should  be  on  one 
of  the  regular  forms  prescribed  by  the  court,  setting 
out  the  name  of  the  bankrupt,  his  residence,  and  the 
date  on  which  he  was  adjudicated,  that  he  has  given 
up  all  his  property  and  fully  complied  with  the  bank- 
ruptcy act,  and  should  contain  the  prayer  that  he 
may  be  given  a  full  discharge  from  all  debts  provable 
against  his  estate,  except  such  debts  as  are  exempt 


BANKRUPTCY  33 

by  law  from  the  discharge.  It  must  be  signed  and 
dated  by  the  bankrupt  in  person. 

A  petition  for  discharge  may  be  filed  after  the  end 
of  the  year  and  within  eighteen  months  from  the 
adjudication  only  on  leave  of  court  after  notice  to 
the  creditors.  It  must  be  filed  in  the  clerk's  office 
of  the  district  court.  The  time  is  computed  by  ex- 
cluding the  first  day  and  including  the  last,  unless 
the  last  fall  on  a  Sunday  or  holiday,  when  the  day 
last  included  will  be  the  first  secular  day  thereafter. 

The  clerk's  office  is  bound  to  send  notice  to  all 
creditors  as  soon  as  the  petition  is  filed  and  it  is  your 
duty  to  see  that  all  creditors  are  properly  notified 
and  that  the  clerk  makes  a  proper  return  of  the  pro- 
ceedings to  that  effect,  as  this  is  vital  to  the  validity 
of  the  discharge.  If  any  creditors  have  become 
known  to  you  and  were  not  included  in  the  petition 
in  bankruptcy,  you  should  have  the  petition  amended 
by  including  them  before  you  file  your  petition  in 
discharge.  But  if  these  new  creditors  come  to  your 
attention  after  the  petition  in  discharge  is  filed,  you 
should  arrange  with  the  clerk's  office  to  send  them 
notice  of  the  petition  for  discharge  in  time  to  appear 
and  oppose  it.  Even  a  creditor  who  has  not  proved 
his  claim  is  entitled  to  have  notice. 

OPPOSITION  TO  DISCHARGE 

The  discharge  may  be  opposed  by  any  creditor  who 
has  an  interest  in  it  and  therefore  not  by  one  whose 
debt  is  not  affected  by  the  discharge.  It  may  be 
opposed  also  by  the  trustee  in  bankruptcy  and  the 


34  MODERN  AMERICAN  LAW  LECTURE 

executor  or  administrator  of  a  deceased  creditor.  If 
the  creditor  who  opposed  the  discharge  abandons  it 
the  court  may  permit  other  creditors  to  carry  on  the 
opposition  as  if  they  had  originally  begun  it.  A 
creditor  may  file  an  appearance  in  opposition  to  the 
discharge  on  the  return  day  of  the  order  of  notice 
and  within  ten  days  thereafter  he  must  file  specifica- 
tions in  writing,  setting  out  the  grounds  of  his  oppo- 
sition. If  specifications  are  filed  you  should  examine 
them  carefully  and  see  that  they  are  complete,  show- 
ing the  name  of  the  creditor  and  that  he  is  a  party 
in  interest,  containing  allegations  of  fact  and  not 
conclusions  of  law,  and  it  is  not  enough  to  follow  the 
words  of  the  act,  except  as  to  the  charge  of  failure 
to  keep  books  of  account.  Where  the  ground  of 
objection  is  some  crime  under  the  act  the  crime  must 
be  described  with  the  same  particularity  required  in 
a  criminal  information  and  must  be  charged  to  have 
been  "knowingly  and  fraudulently"  done.  Conceal- 
ment of  property,  false  oath  or  other  fraud  must  be 
set  out  showing  the  exact  facts  relied  upon,  and  the 
specification  must  be  signed  and  sworn  to  by  the 
party  in  interest  or  by  his  agent  or  attorney  who 
swears  to  have  knowledge  of  the  facts. 

If  you  desire  to  attack  the  form  of  the  specifica- 
tions you  can  move  to  strike  them  out  if  they  are 
vague  or  you  may  rely  on  this  defense  on  the  hearing, 
as  the  court  is  bound  to  disregard  a  vague  allegation. 
If  the  allegations  are  insufficient  you  may  demur  or 
file  exceptions  to  them.  If  you  do  not  object,  the 
defect  will  be  regarded  as  waived  unless  the  specifi- 
cations are  clearly  insufficient.  If  you  desire  to 


BANKRUPTCY  35 

defend  by  way  of  confession  and  avoidance  you 
should  file  an  answer  setting  out  your  client's  posi- 
tion clearly.  As  a  matter  of  policy  it  is  usually  better 
to  file  all  possible  objections  to  the  creditor's  plead- 
ings, as  the  harder  you  fight  and  the  more  trouble 
you  put  them  to,  the  more  apt  they  are  to  lose  interest 
in  the  case.  Creditors  are  usually  not  willing  to 
spend  much  money,  as  it  is  usually  impossible  for 
them  to  combine  and  share  expenses  and  no  one  cred- 
itor or  group  of  creditors  is  apt  to  risk  much  money 
in  litigation  which  must  inure  to  the  benefit  of  all. 
Of  course  if  the  trustee  has  in  his  hands  sufficient 
property  to  pay  for  litigation  the  situation  is  differ- 
ent, but  one  or  two  creditors  will  soon  tire  of  spend- 
ing money  simply  to  punish  the  bankrupt  or  benefit 
the  estate. 


GROUNDS  FOB  OPPOSING  A  DISCHARGE 

The  creditors  may  oppose  your  client's  discharge 
on  various  grounds,  but  whatever  the  ground  you 
must  remember  that  the  burden  lies  on  them  to  prove 
whatever  facts  they  set  out.  One  ground  of  oppo- 
sition is  that  the  court  has  no  jurisdiction  of  the 
proceedings.  The  creditors  may  allege  that  your 
client  has  committed  some  offense  under  the  bank- 
ruptcy act,  as  concealment  of  property,  making  a 
false  oath  or  presenting  any  false  claim  for  proof 
or  using  any  such  claim  or  has  taken  or  received 
any  property  after  the  filing  of  the  petition  which 
belongs  to  the  creditors  or  has  extorted  or  attempted 
to  extort  anything  as  a  consideration  for  acting  or 


36  MODERN  AMERICAN  LAW  LECTURE 

forbearing  to  act  in  bankruptcy  proceedings.  These 
acts  do  not  include  acts  of  the  bankrupt  in  the  pro- 
ceedings for  the  discharge  itself.  Another  ground 
for  opposing  the  discharge  is  collusion  with  a  cred- 
itor to  prevent  his  filing  any  opposition  to  the  dis- 
charge, and  it  is  your  duty  to  see  that  your  client 
makes  no  such  bargain.  Another  ground  for  oppo- 
sition is  that  the  bankrupt  has  destroyed,  concealed 
or  failed  to  keep  books  of  account  or  records  from 
which  his  financial  condition  might  be  ascertained, 
if  he  has  done  this  with  intent  to  conceal  his  financial 
condition.  The  creditors  must  prove  this  intent  on 
the  part  of  your  client.  The  bankruptcy  act  requires 
no  particular  form  of  accounting  and  you  need  not 
worry  about  this  charge  if  }^our  client  has  kept  rea- 
sonably correct  books  in  the  form  commonly  used  in 
the  business  in  which  he  is  engaged.  You  will,  of 
course,  advise  him  when  he  first  comes  to  you  on  no 
account  to  destroy  or  conceal  any  books  that  he  may 
then  have,  as  the  trustee  is  entitled  to  them. 

Another  ground  for  opposing  a  discharge  is  the 
making  of  a  false  statement  in  writing  to  a  creditor 
for  the  purpose  of  obtaining  property  on  credit 
which  your  client  has  obtained.  The  creditor  must 
prove  that  the  statement  was  wilfully  and  intention- 
ally misleading  and  that  it  was  relied  upon  by  the 
creditor  when  he  sold  the  goods  to  your  client.  An- 
other bar  to  the  discharge  is  that  the  bankrupt  has 
within  four  months  before  the  filing  of  the  petition 
transferred  or  concealed  any  of  his  property  with 
intent  to  hinder,  delay,  or  defraud  his  creditors. 
This  language  covers  a  fraudulent  transfer  within 


BANKRUPTCY  37 

the  old  English  statute  of  Elizabeth  and  when  this 
charge  is  made  against  your  client  you  should  study 
the  decisions  which  consider  that  statute  as  well  as 
the  bankruptcy  decisions  to  see  that  the  creditors 
bring  their  case  within  the  authorities.  Another  bar 
to  the  discharge  is  that  your  client  has  already  re- 
ceived a  discharge  within  six  years  of  the  date  of 
action  upon  the  new  petition.  Your  client  will  also 
not  be  allowed  a  discharge  if  he  has  refused  during 
the  proceedings  to  obey  any  lawful  order  or  refused 
to  answer  any  proper  question  put  to  him. 

HEARING 

You  are  entitled  to  a  full  hearing  before  the  court 
on  the  question  of  discharge,  although  the  court  may 
send  the  matter  to  the  referee,  sitting  as  a  Master  in 
Chancery,  to  report  the  facts  and  his  recommenda- 
tions, and  the  court  may  even  frame  issues  to  be 
tried  by  the  jury,  although  this  latter  expedient  is 
seldom  resorted  to.  At  the  hearing  the  statements 
made  by  your  client  in  his  examination  are  material, 
but  you  must  not  allow  the  previous  testimony  of  any 
other  witnesses  to  be  introduced  against  him.  You 
should  see  that  the  record  disposes  of  the  creditors' 
objections  to  the  discharge,  before  the  final  order  of 
discharge  is  made  up. 

EFFECT  AND  REVOCATION  OF  DISCHARGE 

The  effect  of  the  discharge  is  to  bar  any  action  on 
the  debt,  but  it  does  not  extinguish  the  debt  itself. 
You  should  therefore  advise  vour  client  if  he  should 


3S  MODERN  AMERICAN  LAW  LECTURE 

be  sued  later  on  any  debt  included  in  the  discharge 
that  he  must  appear  in  the  proceeding  and  set  up 
his  discharge,  as  otherwise  a  new  judgment  may  be 
obtained  against  him  on  the  old  debt.  For  the  same 
reason  a  new  promise  in  writing  may  enable  the 
creditor  to  sue  on  the  old  debt  and  therefore  you 
must  advise  your  client  very  carefully  not  to  make 
any  promise  to  pay  those  debts  which  are  included  in 
the  bankruptcy  proceeding.  A  discharge  is  not  a 
bar  to  taxes  or  to  liabilities  for  fraud  or  wilful  or 
malicious  injuries,  alimony  or  support  of  wife  and 
child,  seduction,  or  criminal  conversation.  A  dis- 
charge is  further  no  bar  to  creditors  who  are  not 
included  in  the  proceedings,  unless  your  client  can 
prove  that  they  have  notice  or  actual  knowledge  of  it. 
Wilful  and  malicious  injuries  include  liabilities  for 
alienation  of  affections,  assault  and  battery,  false 
imprisonment,  malicious  prosecution,  and  libel  or 
slander,  while  liabilities  for  ordinary  conversion  of 
property  without  malice  or  negligence  without  mal- 
ice are  released  by  the  discharge.  A  discharge  is 
further  no  bar  to  a  liability  for  misappropriation  or 
embezzlement  or  any  breach  of  faith  by  a  fiduciary. 
This  latter  word  includes  attorneys  or  public  officers, 
but  not  ordinary  bailees,  buyers  and  sellers,  bankers 
or  brokers,  or  partners  unless  these  have  acted  with 
malicious  intent. 

A  discharge  after  it  has  once  been  granted  may  be 
vacated  or  revoked  on  petition  filed  at  any  time 
within  a  year  by  parties  in  interest  who  have  not 
been  guilty  of  laches  in  opposing  the  original  dis- 
charge if  the  discharge  was  obtained  through  the 


BANKRUPTCY  39 

fraud  of  your  client.  As  a  practical  matter  the  dis- 
charge will  not  be  vacated  unless  the  court  is  satisfied 
that  the  creditor  had  no  knowledge  of  the  fact  relied 
upon  at  the  time  the  discharge  was  granted. 


(I. 


GAYLAMOUNT®"" 
PAMPHLET  BINDER 
Syracuse,  N.Y. 
Stockton,  Colif. 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


A     000689125     3 


